India is Changing and Foreigners are Licking their Chops

India's steel industry is about to go through a huge change, setting up some tense fights that spell increased opportunity for foreign iron ore players.

Feb 28, 2014 at 10:05AM

Although it lives in the shadows of China, India is a fast growing nation in its own right. However, with growth often comes difficult change. One area that's working through such dislocations is steel—and that spells an opportunity for iron ore miners like Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP), and Vale (NYSE:VALE).

That was then...
According to India's Ministry of Steel, the country's iron ore production has historically outpaced its consumption. For example, "iron ore production during 2011-12 (provisional) was about 167.28 million tonnes" with domestic consumption of, "about 116.3 million tonnes..." Essentially, production outstripped consumption by about 40%. The country is used to exporting this natural resource.

And this is now
However, in the same document, the ministry looked to the future. "Considering the growth of the iron and steel industry and planned steel capacities, the present resources of high grade iron ore in the country may not be sufficient to meet the long term requirement of [the] domestic iron and steel industry."

That's one reason why the government recently sent representatives to Australia and New Zealand to, "...boost cooperation in the areas of mining and coal supply." It appears to have no choice, since there are plans on the table to increase steel production from around 100 million tons to 300 million tons by 2025.

The fighting starts
That helps explain India's hefty 30% tax on iron ore exports. There's also a 5% tax on the export of iron ore pellets. As you would expect, there are industry players and politicians lining up on both sides of the issue. Iron ore producers want the 5% tax killed, once the material has been processed into pellets. Steel manufacturers want it raised to 30%, suggesting that selling iron ore pellets is just a way to get around the 30% iron ore tax.

Regardless of how this fight comes out, the long-term picture looks pretty clear—India is going to need to import more iron ore (and metallurgical coal). That's going to be good news for iron ore miners, particularly those with nearby mines like Rio and BHP. Both of these diversified miners have big operations in Australia, which is a short boat ride away from both India and China, the current driving force in the iron ore market.

Gearing up for it
The thing is, India's ascension into the steel big leagues won't happen overnight, but by the time it does it will be too late to do anything about it on the iron ore side. Preparations have to be made now. That's why BHP is working to increase the throughput at its Aussie export terminals. Rio, meanwhile, has similar projects under way, but also has much larger projects waiting in the wings so it can really ramp up iron ore production when the time comes.

Vale is another player watching India, but its operations are largely located in South America. That puts it at something of a disadvantage in Asia, but that isn't stopping the miner from expanding its iron ore production. Vale hopes to increase production by around 50% over the next four or five years. At the same time it's continuing to put money toward its logistics assets, so it can get its iron ore into foreign ports as easily as possible.

Watch iron ore, but don't forget coal
Iron ore is big business as Rio, BHP, and Vale. However, all three are also players in the steel making coal space. So there's a potential double benefit from India producing more steel. That said, keep an eye on coal giant Peabody Energy (NYSE:BTU), too. This miner sells metallurgical coal out of Australia and should benefit right along with the iron ore miners as India's steel production ramps up.

While over supply may be a constraining issue in iron ore and coal today, India could quickly change that. For example, Peabody has been highlighting Indian demand for some time now. Vale, BHP, and Rio have, too. The tax fight suggests that India's transition from exporter to importer could be close at hand. Make sure you watch the country's progress if you follow mining stocks.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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